Banks develop loan program for value-added

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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.

First National Bank of Valley City, ND, and two affiliated banks—First State Bank of Casselton, ND, and the Litchville State Bank, Litchville, ND—have developed a Value-Added Cooperative Stock Purchase Loan Program.

The program is designed for producers who want to purchase shares in start-up or existing cooperatives intended to process ND crops and livestock. The loan will cover up to 100% of the stock purchase price of the co-op stock, over a maximum term of seven years.

A key advantage of the program: Principal payments may be deferred up to three years. Thus, a participating producer does not have to dip into other capital or operating lines of credit to finance participation in a value-added venture. The loan is not included in the producer’s normal operating lines of credit.

Another advantage of the loan program is that it recognizes stock value as collateral after three to five years of positive co-op performance.

"More producers want to maintain ownership beyond their farms, but to create the ventures to do that, there needs to be cash flow. There’s a special need here from the banking side to provide the producer funding that will be low maintenance for a few years," says Dennis White, president and CEO of the three banks, all owned by First Bancshares of Valley City Inc. "We put the emphasis on three years, because our research indicates it historically takes that long for a new venture to establish a market and a consistent supply."

The loan program was adopted by the three-bank system last summer, after a revision of internal policies and other steps needed to meet official credit procedures. The fact that loan underwriters approved the program says a lot about how the value-added concept is now viewed by lenders.

"In the past there’s been uncertainty about whether producers can do this. But the underwriting approval of our loan program really is a vote of confidence to the management abilities of producers who are becoming involved with value-added," says White, who has been in the banking business for over 20 years.

Keeping value-added financing as a separate component of a producer’s credit portfolio will help the producer and the lender keep track of the performance of a particular venture.

"With our computer system we can break out the value-added performance numbers, so it will help to have some performance history for the next one that comes along, or to finance an expansion," he says.

The interest rate under the loan program is variable, and tracks closely with the banks’ other loans. "The rate will be consistent with a person’s farm file, and based on a producer’s individual risk," says White. Three to five years of financial records and a prospectus of a co-op venture is needed for loan approval.

White anticipates that the majority of his farm customers who are becoming involved with value-added ventures will use the three-bank system’s value-added loan program. For stock expansion in existing co-ops as well.

White hopes other rural banks will develop similar loan programs for producers. He’s promoting the concept through his involvement on the Agricultural Rural Development Committee, which consists of rural banks across the nation, and is affiliated with the Independent Association Bankers of America.

The value-added concept is still catching on with producers and ag lenders outside of the Upper Midwest. But the bottom line is that value-added is a trend which will only be embraced more strongly by the production agriculture sector. That means the concept cannot be ignored by rural banks.

"This is a nontraditional lending function to fill. But as an independent rural bank, we need to move to the future," says White. "If we don’t have agriculture, we don’t have assets."

January 1997